Posted on May 20, 2014 by Donald Stever
The old adage, jokingly told by my college Economics 101 prof, that “economics is not a science but rather a black art”, is amply borne out by disputes between warring factions of resource economists that are playing out in ground water contamination natural resource damages litigation in New Jersey, Puerto Rico, and elsewhere. The issue: how to value contaminated ground water. So far, the few courts that have actually looked at this issue have been skeptical of the “creative” economics propounded largely by the plaintiff bar.
In one corner, we have the classical economists, usually retained by the defendants’ bar, who argue that ground water must be valued based on the impairment of an economic use, such as potable fresh water that could otherwise be consumed or ground water that could otherwise be used for crop irrigation or for industrial process uses. They call this “use value.” Let’s say that we have a facility that contaminates ground water that is naturally salty, does not meet the federal SDWA secondary drinking water standards, and is not migrating beneath anybody else’s property, or generally any ground water that is not impacting any offsite user. These economists argue that this water should not be valued for its loss as potential drinking water or other uses and thus the cost of replacing it should not be considered, leaving the monetary resource value of this water to be zero.
In the other corner we have the “creative” guys, typically retained by plaintiffs. They advance several theories upon which to predicate large monetary values for contaminated, but unused and unusable, ground water. Here are three:
Benefits Transfer: Under this theory, clean ground water has an inherent “value” to people, called by its proponents “existence value” and thus whether it is used or not, or anybody suffers actual harm or not, is irrelevant. The proponents of this theory rely on several, mostly old, studies in which groups of people were asked what they would pay to have assurance that their own ground water supply would be free of contamination. For example, would they contribute to the cost to construct a treatment facility? These economists then use an algorithm to calculate a per-gallon “value” of the contaminated ground water using the monetary values derived from those studies. This approach ignores real-world concepts of economic value, substituting for it a sort of fictional “gestalt” value.
Resource Equivalency Analysis: This approach borrows from techniques appropriately used to value damaged wetlands or plant or animal habitat. Its proponents also assume that ground water has inherent economic (“existence”) value. They first calculate the volume of contaminated groundwater over time, and attempt to determine what it would cost to purchase an amount of land sufficient to “protect” an equivalent volume of ground water elsewhere in perpetuity. Although this approach works for habitats, it has all kinds of problems when applied to ground water. For example, in one recent case the economist’s “equivalent” resource was a fresh water aquifer, which he was projecting as equivalent to a saline portion of the same aquifer, ignoring the fundamental meaning of the word “equivalency.” Additionally, protecting ground water resources by preserving land also provides extraneous environmental benefits — such as providing habitat — which the theory seems to ignore. Furthermore, it is very difficult to determine appropriate land values.
Wasteful Use: This is my favorite. In a pending litigation, a plaintiff economist named Kevin Boyle asserted that extracting contaminated seaside ground water from beneath an industrial facility, treating it to remove contaminants pursuant to a RCRA corrective action permit, and discharging the treated water to the ocean, constitutes a “wasteful use” of the extracted ground water. His argument was premised on returning the treated water to the aquifer and thus making it available for use, instead of discharging the water to the ocean. But the aquifer in question was naturally salty, on the edge of the ocean, naturally flowed out under the ocean, and the recharge area would have been entirely within the property of the industrial defendant. He calculated his “wasteful use” value as the per gallon rack price of an equivalent volume of desalinated water sold to the public by the local water utility.
Stay tuned, sports fans. Surely more to come.